A company falling sick is synonymous with having challenges in its finances and management. Therefore, it can decide to change its financial, structural, and operational features to ensure that it gets business investment opportunities, cut down costs and keeps being a going concern. This can be done either internally, that is, amongst the company and its creditors, or externally that is involving a third party. This process is called Corporate restructuring.
INTRODUCTION
One of the advantages of incorporation of a company, as provided by the Companies and Allied Matters Act, is that it gives such a company a distinct legal personality from its owners. That is, in the eyes of the law, it is a human being and has the rights, liabilities, and capacities of a human being. Therefore, such a company can enter into a contract in its name, acquire and discharge properties, sue and be sued, and just like humans, these companies can also birth other companies, fall sick and recover from the same, and finally, it can die.
A company falling sick is synonymous with it having challenges in its finances and management. Therefore, it can decide to change its financial, structural, and operational features to ensure that it gets business investment opportunities, cut down costs, and keeps being a going concern. This can be done either internally, that is amongst the company and its creditors, or externally, that is involving a third party. This process is called Corporate restructuring.
This article will explain what Corporate restructuring is and the forms of restructuring available to companies in Nigeria.
WHAT IS CORPORATE RESTRUCTURING
According to Investopedia, Corporate restructuring is the process of reorganizing a company. It is a corporate action done by a company to significantly change its financial and operational features.[1] Companies may need to restructure their operations at some point during the course of their business. Usually, restructuring becomes a necessity when a company is facing financial difficulties. Companies may also restructure to comply with new regulatory requirements as the need arises, or when there is a change in ownership of the company.[2] This restructure usually brings about a change in the legal, ownership, or operational structure of the company.
CORPORATE RESTRUCTURING OPTIONS FOR COMPANIES IN NIGERIA
There are several restructuring options as provided by the laws[3] that a company may decide to explore, depending on the current situation and needs of the company. This can be an internal restructuring or an external restructuring. Internal restructuring is a restructuring process involving the companies and their creditors. Examples of internal restructuring are Arrangement and compromise, Buy-out, etc., while external restructuring is a restructuring process that involves the company and another company. Examples are Mergers, Acquisitions, Take-over, etc.
ARRANGEMENT AND COMPROMISE
Arrangement is defined as any change in the right and liabilities of members, debentures holders or creditors, or any class of them, or in the regulation of the company other than a change, effect under any other provision of this Act, or by the unanimous agreement of all parties affected.[4] It can take the form of compelling the shareholders to contribute further capital or agreeing with preference shareholders to convert their preference shares into ordinary shares, or reduction of dividend right by preference shareholders etc.
Where a company proposes an arrangement or compromise between it and its creditors, the company or the creditors, or the liquidator for a company being wound up will apply to the Court[5] in a summary way, to order a meeting of the creditors or members of the company as the Court may direct[6].
The compromise arrangement or compromise will be presented and votes will be cast by the members present at the meeting. If a majority of at least three-quarters of the members present at the meeting agree to the arrangement or compromise, the arrangement or compromise will be referred by the Court to the Securities and Exchange Commission, which will investigate the fairness of the arrangement or compromise.[7]
If the Court is satisfied with the fairness of the arrangement or compromise, it will be sanctioned. When this arrangement or compromise is sanctioned, it becomes binding on the creditors, members, or company as the case may be.[8] Such sanction will not be effective until a certified true copy of the arrangement or compromise is submitted by the company to the Corporate Affairs Commission, and is annexed to the memorandum of the company prepared after the arrangement or compromise has been sanctioned by the Court.[9]
ARRANGEMENT ON SALE
This occurs when a company by a special resolution, resolve that the company is put into a members voluntary winding up, and a liquidator be appointed to sell part or whole of the company’s undertaking and assets, to another corporate body, whether a company or not in consideration part or fully paid shares, to be distributed among the members of the company, in accordance with their rights in liquidation.[10]
All sales or distributions done in pursuance of the special resolution are binding on the company and its members, and the members are deemed to have agreed with the transferee company to accept the fully paid shares, debentures, policies, cash, or others like interest to which they are entitled under such distribution.[11] However, where a member brings an action on grounds of unfairly prejudicial and oppressive conduct[12] for the winding up of the company, the arrangement for sale and distribution shall not be valid unless sanctioned by the Court.[13]
MANAGEMENT BUY-OUT
This occurs when the management team of a company acquires the controlling shares of that company, with or without third-party funding in order to make the company survive a slack back.[14] The management team here is usually the directors and officers of the company. They often refer to this restructuring option to prevent an external take-over, acquisition, or merger from third parties who might not have the same mission and vision of the company.
For this to be done;
An application for the approval of the Management Buy-Out is to be filed by the management team making the acquisition. A copy of the special resolution of the Shareholders of the company approving the management Buy-out. A copy of the resolution of the management team to undertake the same. A copy of the Certificate of Incorporation of the company. A copy of the memorandum and article of association of the company. Two copies of the Prospectus of the company. A copy of the sale agreement between the company and the management team. And any other document required by SEC from time to time.[15] Where the employees of a company buy the controlling shares of the company, it is called employee Buy-out.
MERGERS
A merger is said to have occurred when one or more companies directly or indirectly, acquire or get a direct or indirect control, either partly or wholly of the business of another company. This can be achieved through the purchase or lease of shares, interest, or assets of the company in question, or the merging with the other company or a joint venture.[16]
For a company to have control over another company, it must;
Own more than half of the issued share capital of the other company. Be entitled to cast the majority vote that may be cast in the general meeting of the other company. Be able to appoint or veto the appointment of a majority director, if a holding company and the other company is a subsidiary company as provided for under the Companies and Allied Matter Act, or, have the ability to influence materially the policy of the other company.[17] There are 3 types of mergers as defined by Rule 421 (1) of the Securities and Exchange Commission Rules:
A horizontal Merger: Is a merger involving direct competitors who are in the same line of business. Horizontal mergers may lead to a monopoly of that line of business because it lessens competition. Examples are mergers of two banks or mergers of two telecommunication companies.
A vertical Merger: Is a merger involving non-competitive companies. That is, they are not in the same line of business and are therefore not competitors but they, however, complement each other. An example is food processing companies and farming companies.
Conglomerate Merger: Is a merger involving two companies engaged in entirely unrelated business. An example is a fashion line and an energy company.
Any of the above mergers can either be a small merger, that is, a merger with a value at or below the lower threshold which is 1, 000, 000,000-naira (One Billion), or an intermediate merger that is a merger with a value between the lower and the upper threshold which is 1, 000, 000, 000 (one billion) and 5, 000, 000, 000 (five billion) naira, or a large merger that is a merger with a value above the upper threshold which 5, 000, 000, 000 (five billion) and above.[18]
For a proposed merger to be implemented, it must first be notified and approved by the Federal Competition Consumer Protection Commission (the Commission), which will determine the threshold of the annual turnover of the company to determine the category of merger and the method of calculating the annual turn-over.[19] The commission will also determine whether or not the merger will reduce competition, result in technological efficiency or other pro-competitive gains, or whether it can or cannot be justified on substantial public interest.[20]
ACQUISITION
The Securities and Exchange Commission Rules have defined Acquisition as when a person or group of persons buys most of a company’s shares in order to assume ownership of that company.[21] It is the acquisition of one company by another company in which no new company is formed.[22] For this to happen, the acquirer shall file a letter of intent to the Securities and Exchange Commission by a registered capital market operator registered to function as an issuing house.[23]
The Securities and Exchange Commission has been saddled with the responsibility of regulating acquisitions in both public and private unquoted companies, through the filling and approval of the requirements for acquisitions by any corporate body or individual.[24] The Commission also carries out a post-incorporation inspection three months after the approval of the application.[25]
TAKE-OVER
According to the Investment and Securities Act, a Take-over is the acquisition by one company of sufficient shares in another company to give the acquiring company control over the other company.[26] The acquiring company acquires at least 30% to 50% of the shares or voting rights in the acquired company. For take-over to occur, there must be a take-over bid. A take-over bid is a corporate action in which a company makes an offer to purchase another company. The acquiring company offers cash, stock, or a combination of both cash and stock in an attempt to take control of the target company.[27]
A Take-over bid is deemed to be made by a person or persons who either himself or themselves or through his agent or their agents, dispatches a bid to the Shareholders at nearly the same time in order to re-purchase the company’s own shares,[28] or by a company by itself or through its agent when it dispatches a bid to its Shareholders at nearly the same time in order to re-purchase the company’s own shares[29]
A Take-over bid shall not be made to less than twenty Shareholders or such number prescribed by the commission, neither shall it be made to purchase shares in a company which has fewer than twenty or such prescribed number by the regulations, nor to a private company.[30] For a person or group of persons to make a take-over bid, he or they must first be granted the authority to proceed with the take-over bid by the Securities and Exchange Commission.[31]
This authority shall be in writing, signed by the Securities and Exchange Commission, dated with full particulars to enable identification of the bid,[32] and will remain in force three months after the grant of the authority, or for a longer period as the commission may deem fit upon an application to him for the extension of time.[33]
CONCLUSION
Corporate restructuring has over the years proven to be the best way of saving a corporate entity from an untimely death (winding up or dissolution). It is geared towards increasing efficiency, competitive edge, profits, and prolonging the life span of a corporate entity.
AUTHOR: Oyetola Muyiwa Atoyebi, SAN.
Mr. Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm) where he also doubles as the Team Lead of the Firm’s Emerging Areas of Law Practice.
Mr. Atoyebi has expertise in and a vast knowledge of Corporate and Commercial Law and this has seen him advise and represent his vast clientele in a myriad of high level transactions. He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of a Senior Advocate of Nigeria.
He can be reached at atoyebi@omaplex.com.ng
COUNTRIBUTOR: Joy Ayara.
Joy is a member of the Corporate and Commercial Team OMAPLEX Law Firm. She also holds commendable legal expertise in Mergers and Acquisition.
She can be reached at joy.ayara@omaplex.com.ng
[1] Alexandra Twin ‘Restructuring’ https://www.investopedia.com/terms/r/restructuring.asp <accessed 14/04/2022>
[2] Wikipedia ‘Restructuring’ https://en.wikipedia.org/wiki/Restructuring <accessed 18/04/2022>
[3] Companies and Allied Matters Act 2020, Federal Competition and Consumer Protection Act 2019, Investment and Securities Act 2007, Securities and Exchange Commission Rules, etc.
[4] Section 710 CAMA 2020
[5] Federal High Court
[6] Section 715 (1)
[7] Section 715 (2)
[8] Section 715 (3)
[9] Section 715 (4)
[10] Section 714 (1)
[11] Section 714 (2)
[12] Section 353 to 355
[13] Section 714 (2)
[14] Rule 449 (a) SEC Rules 2013
[15] Rule 449 (b) SEC Rules 2013
[16] Section 92 (1) FCCPA 2018
[17] Section 92 (2) FCCPA 2019
[18] Rule 427 (1) SEC Rules
[19] Section 93 (1) FCCP 2019
[20] Section 94 FCCPA 2019
[21] Rule 433 SEC Rules 2013
[22] Mondaq ‘A General View Of Corporate Restructuring’ https://www.mondaq.com/nigeria/corporate-governance/894972/a-general-overview-of-corporate-restructuring-in-nigeria <accessed 19/04/2022>
[23] Rule 434 (a) SEC Rules 2013
[24] Rule 434 SEC Rules 2013
[25] Rule 439 SEC Rule 2013
[26] Section 117 Investment and Securities Act 2007
[27] Investopedia ‘Takeover Bid’ https://www.investopedia.com/terms/t/takeoverbid.asp <accessed 18/04/ 2022>
[28] Section 133 (1) Investment and Securities Act 2007
[29] Section 133 (2) Investment and Securities Act 2007
[30]Section 133 (3 & 4) Investment and Securities Act 2007
[31] Section 134 (1) Investment and Securities Act 2007
[32] Section 134 (7) Investment and Securities Act 2007
[33] Section 134 (8) Investment and Securities Act 2007